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PrairieSky Royalty (PSK‐TSX); HOLD, C$15.50 ― Solid Q4: raising production forecasts, but reducing target & rating due to lower oil prices
PrairieSky Royalty Ltd
Q3 CFPS of $0.28 (dil.) was in line with consensus, as was production, which was up 2% Q/Q (liquids up 1% Q/Q). Management continues to expect oil production to grow in Q4. We have nudged our ‘19e/’20e CFPS estimates down 2%/3%, on reductions to oil forecasts, partly offset by increased NGLs forecasts. TP lowered by $0.50 to $29.00/share, reflecting the average calculated Atax NPV5 of our new DCF model at our deck and the strip.
2Q16 net production was flat sequentially but better than expected, while cash flow missed our forecasts by $0.01/share as gas price realizations were weak due to accrual adjustments for the prior quarter. In our view the shares appear reasonably valued in the context of other oil & gas royalty peers. $29.00/share target price unchanged, but we are upgrading to Outperform.
Market Impact: Neutral. Funds flow of $0.19/share was slightly behind our $0.20/share estimate, which was also the survey median. Relative to our estimates, realized prices for natural gas were weaker than expected (actual $0.67/mcf, FirstEnergy $1.25/mcf), which more than offset higher than expected net production, which once again benefitted significantly from positive prior period adjustments.
PrairieSky purchased the royalty assets that Pine Cliff Energy (TSX: PNE, covered by analyst Michael Hearn) announced on Monday that it was selling for $25 mm. PNE's Based on PNE's press release, PSK paid ~9.3x run rate EBITDAX of $2.7 mm ($2.7 mm royalty revenue expected over the next 12 months, assuming current commodity prices remain flat), which, assuming a low decline rate, seems quite reasonable and accretive to PSK.
From recent lows, we see PSK offering three factors of one-sided torque to increased commodity prices: price, drilling activity, and sliding scale royalty rates. We believe all three of these factors have bottomed and are likely to move higher over time. If not, PSK can still fund its recently revised dividend at strip pricing without drawing on cash.
Market Impact: Neutral. Cash flow came in slightly ahead of expectations, primarily due to prior period adjustments.
4Q15 cash flow of $60.0 mm beat expectations ($23 mm tax recovery). Production of 17,651 boe/d beat expectations. We estimate pro-forma 4Q15 clean production including the CNRL assets was ~21,250 boe/d. Management expects cash flow at the strip over the next 12 months to fully fund the dividend (~$164 mm/year), which was cut by 45%. 2016 G&A costs are expected to be flat vs. 2015. We have increased our 2016e production forecast by 2% to 21,034 boe/d, and our cash flow estimate by 8% to $177 mm (or $155 mm at the strip). Target price increased $1.00 to $23.00/share. Market Perform ranking maintained.
Market Impact: Positive given PSK's financial position is better than expected. 4Q15 cash flow beat expectations, primarily due to a $23 mm current tax recovery. As expected, the dividend was cut, by 45%, and the DRIP and stock dividend program were suspended.
Market impact: Positive, due to modest accretion and acquired tax pools. Canadian Natural Resources ('CNQ') and PrairieSky ('PSK') announced this morning that PSK will be acquiring most of CNQ's royalty lands (~81% of CNQ's royalty production) for $1.8 billion. PSK will pay CNQ $680 mm in cash (to be raised via a concurrent private placement), and issue 44.4 mm PSK shares to CNQ at an ascribed price of $25.20/share.
While PrairieSky’s 2Q15 operating results were disappointing on the surface, underlying gross production on its lands appears to be remaining reasonably steady, and PSK has significantly expanded the work commitments on its acreage, surprising the street with $12 mm in cash proceeds from land deals in the quarter.
Market Impact: Positive.
Market Impact: Slightly Negative.
We have updated our estimates for the recently closed equity financing, our current price deck and 2Q15e realized commodity prices. Although dilution from the financing partially offset positive estimate revisions due to our commodity price update on June 25, we believe the Company is likely to make more near-term accretive acquisitions. As a result, we have reinstated our target price of $31.00/share and Market Perform ranking.
